U.S. dollar falls anew vs. major rivals

ECB chief not as alarmed by euro rise as some thought

By

RachelKoning

CHICAGO (CBS.MW) -- The dollar declined sharply Thursday as the European Central Bank fell short of expressing alarm over a surging euro's export impact, lowering the odds that officials act in the short term to slow the U.S. currency's skid.

The euro was changing hands at $1.2763 in late New York trading on Thursday. That's a gain of more than 1 percent from Wednesday, but even the substantial gain kept the shared currency shy of the all-time high of $1.2812 hit earlier this week.

Meanwhile, the dollar was flat against the Japanese yen, trading at 106.14 yen. Expectations that Japanese officials won't hesitate to intervene in currency markets to keep their nation's exports competitive have served to support the greenback. The dollar did fall to a three-year-low below 106 yen earlier this week.

At an eagerly awaited press conference, European Central Bank President Jean-Claude Trichet said that the ECB didn't like excessive volatility in the currency markets and that the euro's rise is likely to have some dampening impact on European exports.

But Trichet tempered his remarks when he added that global economic expansion should lift exports overall, also noting that the euro's rise helps to dampen inflationary risks.

"In this dollar-negative environment, even neutral to euro-negative comments aren't negative enough," said Alan Ruskin, research director at 4Cast in New York.

Many analysts think foreign investors may not keep up their purchases of U.S. assets given decades-low -- and likely only modestly rising -- U.S. interest rates. Foreign demand has essentially offset the record goods trade deficit and federal budget deficit shouldered by the United States. If foreign investors pull out, the trade-related pressure on the dollar could send the currency and financial market reeling. See Market Snapshot and Bond Report.

Trichet's comments follow the ECB's decision earlier Thursday to leave benchmark interest rates at 2 percent. The Bank of England also left monetary policy untouched. Read more in Europe Markets.

The dollar staged what turned out to be a short-lived rebound against its major rivals in the previous session, as some investors bet the "pain" threshold for European manufacturers tied to the rising euro was likely to be reached sooner rather than later - perhaps even prompting currency market intervention on the euro's behalf.

"Only a close below $1.2475 will put the seal on a significant bearish reversal" for the euro, said Cornelius Luca, a technical analyst with Global Forex Trading, who added that the euro remains significantly overbought from a technical trading perspective.

Before his comments, the market had been guessing Trichet might at least try to "talk down" the euro. Leaders from the Group of Seven largest industrialized nations will meet in the United States in early February, with the dollar's double-digit decline expected to be chief among the session's topics.

Most analysts think the euro could rise to as much as $1.30 to $1.35 this year.

Meanwhile, European Union Trade Commissioner Pascal Lamy said the euro-dollar rate was nearing a level that could prove worrying for the competitiveness of eurozone products, Reuters reported.

In other foreign exchange trading, the British pound gained 0.9 percent to stand at $1.8327 -- its richest dollar value in more than 11 years.

The dollar dropped 1.1 percent vs. the Swiss franc, at 1.2263 francs, and continues to trade at multiyear lows.

Negative drumbeat

U.S. Federal Reserve Gov. Donald Kohn said Wednesday night that the dollar's adjustment to date has not been dramatic enough to pose a problem for the United States.

But he added that at some point, foreigners may no longer be "willing to fund U.S. deficits."

Accordingly, the dollar has failed to get any lift from upbeat U.S. economic figures, including weekly jobless-claims data issued Thursday.

Fewer Americans are collecting state unemployment benefits than at any time in the past 27 months, the Labor Department reported.

Meanwhile, the four-week average of initial claims for state unemployment benefits fell by 5,500 to stand at 350,250 in the week ended Jan. 3. It's the lowest number since Feb. 3, 2001.

Some analysts say that dollar losses may be curbed in anticipation of a strong U.S. monthly jobs report due Friday. See Economic Preview.

Fears of Bank of Japan intervention underpinned the dollar against the yen as the finance ministry's top bureaucrat reiterated that Japan was ready to act against excessive volatility in the currency market.

"We will take firm steps against rapid movements," vice finance minister Masakazu Hayashi was quoted by Kyodo News as saying.

The dollar had fallen as low as 105.90 yen in New York on Wednesday before recovering as Treasury Secretary John Snow reiterated America's strong-dollar policy in a luncheon speech.

Dealers, who said that the Bank of Japan may have intervened to prop up the dollar after it slid to a three-year-low below 106 yen, said they had hoped that Snow would make additional comments on the dollar.

Japan spent a record 20 trillion yen in 2003 to try to deflate the yen vs. the dollar.

Year ahead

The dollar remains overvalued by historical standards and so likely stands to see another 10-percent decline this year, said Merrill Lynch's chief global foreign exchange strategist, Yianos Kontopoulos, in a research note. He added that the foreign exchange market's tendency to overshoot in either direction points to dollar weakness at the start of 2005 as well.

To many investors, he said, the cycle of dollar weakness is at a mature stage. While most see the risk of further weakness, the degree of the dollar's decline is expected to be extremely modest from this point forward.

"We see an additional 18 months of dollar weakness, putting the currency's cycle at three and a half years," he said.

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